Wednesday, 23 February 2011

It's a lot of wonga

Ian Holloway’s Blackpool may be like a breath of fresh air to the Premier League. However the seaside club’s willingness to advertise on its shirts a company that charges its customers a whopping 2,689% interest certainly isn’t.

Wonga.com launched its first website in October 2007 and is backed by major investors, including Accel Partners, and one of the largest venture capital funds in Europe, Balderton Capital. It has advertised heavily on TV, radio, and the web and in newspapers.

First time customers can borrow up to £400 for any period up to 30 days, with loans of up to £1,000 for those who’ve re-paid previous loans. Applicants are promised an instant decision, and if approved the company claims they can expect the cash to be in their bank within fifteen minutes. At the end of the agreed loan period the company collects a single payment, providing they have the required funds in their associated bank account, from the customers credit card. Any initial failure to pay costs customers £15 whilst interest is charged for up to sixty days. Non-paying customers could see their account passed to an external collections agency.

A wonga.com customer borrowing £199 over 15 days will repay £234.75, with those borrowing £400 over 30 days repaying £525.48. The company advertises its services on the basis that they’re quick and convenient for customers in urgent need of fast cash, transparent and flexible and compare favourably against the fees banks charge for customers who go overdrawn without authorisation.

None of which has impressed Halifax MP Linda Riordan MP, who said: “I find it very disturbing that these unscrupulous companies can get away with these adverts. It is disgraceful the levels of APR that these companies are charging. They are preying on some of the poorest people in society, and I find it quite distasteful that people are cashing in on making poor people even poorer. I think this exploitation should stop.” In her attempt to do so she last year raised the issue in Parliament through an early day motion that attracted the support of 42 MPs.

However Errol Damelin, founder and Chief Executive Officer of wonga.com denied the company “preyed on anyone. As required by law, we publish our typical Annual Percentage Rate [APR] on the website and in our advertising - which would be very high for a traditional loan taken over several years, but we are not a traditional lender. APR is an annual measure and assumes compounding, yet our loans are only available for up to a month and we don’t compound interest.

We are passionate about responsible lending and this means we decline four out of every five applicants, because we don’t believe they can comfortably afford repayment, and our accepted customers are all fully banked, employed and extremely happy with the service we provide. We offer a valued alternative to payday loans and bank overdraft charges when consumers are faced with an unexpected and urgent expense.”

The setting of APRs is covered by the Consumer Credit Act 1974 and its regulations. And whilst changes to it took place on February 1st, with the implementation of the Consumer Credit Directive, no restrictions on the level companies can charge was introduced providing they properly inform customers.

Asked whether allowing companies to charge in excess of 2600% was guilty of allowing desperate people to be exploited a OFT spokesperson said the organisation “published last year a review of high-cost credit after considering the case for price controls for pawnbroking, payday loans, home credit and rent-to-buy credit. We concluded they would not address the problems where people who use high-cost credit have limited options. We are concerned that such controls may further reduce supply and considers there to be practical problems with their implementation and effectiveness. Whilst we did make recommendations, which we think would deliver worthwhile improvements, more radical approaches, outside the remit of the OFT, need to be examined by the Government if the fundamental and longstanding issues of lack of consumer power and limited supply are to be tackled.”